5 Mistakes Nonprofits Make on Their Form 990 That Send Donors Running

When it comes to fundraising, you may be surprised that some donors, and especially those with deep pockets, could be taking a long look at your nonprofit’s IRS Form 990 before signing their first (or hundredth) donation check.

To encourage transparency, tax-exempt nonprofits are required to disclose their three most recent annual information returns like Form 990s and other tax documents, which can be found publicly on websites like GuideStar, and have their Form 1023 available for inspection. This public disclosure makes it easier for donors to get a realistic picture of an organization’s business and financial status before donating.

Disclosing your organization’s Form 990 means your nonprofit must ensure that the documentation is accurate and know the red flags that donors may be looking out for on your tax returns.

Here are just a few mistakes your nonprofit may be making on its Form 990.

2. Your Nonprofit’s Executives Are Receiving Excessive Compensation

The board of directors is responsible for establishing and ensuring the compensation of your nonprofit’s executives is fair and reasonable. Compensation arrangements for all officers, directors, trustees and key employees should be approved in advance by your governing board or a committee of the board and should be supported by comparability data.

Also, the process your nonprofit uses to approve executive compensation must be described in your Form 990. Donors may evaluate both the process used to determine and the reasonableness of the compensation.

3. You Don’t Have a Conflict of Interest Policy

A conflict of interest policy encourages greater transparency and is perhaps one of the most important policies a nonprofit board can adopt. Donors will often review an organization’s Form 990 to identify:

Whether your organization has a conflict of interest policy in place

If there is a conflict of interest policy in place, whether your organization’s policy requires board members and senior management to annually disclose any real or potential conflicts

The process your nonprofit uses to manage any conflicts.

4. You Don’t Demonstrate that Oversight Is a Priority for Your Organization

Your Form 990 contains a section on governance and your nonprofit’s policies, which can help demonstrate your organization’s commitment to strong oversight. A donor may evaluate the size of the governing board as well as how many board members are independent. Donors may also look to see if the organization has whistleblower and document retention policies as well as whether your Form 990 is reviewed by the board or designated committee prior to filing.

5. Your Overall Budget Could Use Some Trimming

The breakdown of expenses – whether they are management and general expenses or fundraising expenses – in your nonprofit’s overall budget can come under scrutiny by donors. The trouble is, every donor will perceive your expenses in different ways.

Some donors might think management and general expenses indicate inefficiency while others might see those same expenses as necessary for a nonprofit to have strong internal controls and well-managed risks. If you haven’t already, it’s important for your nonprofit to develop a policy that accurately allocates expenses between program, management and general; and fundraising areas and to be as transparent as possible in how the costs are allocated.

Get More Donors With Better Fundraising

To learn more about how your organization can be successful in getting new donors, improve your fundraising efforts and the techniques to get you there, check out our free on-demand webinar, Secrets of Successful Nonprofit Fundraising, presented by fundraising expert Vince Connelly.